97 F.

3d 1450

NOTICE: Fourth Circuit Local Rule 36(c) states that citation

of unpublished dispositions is disfavored except for establishing
res judicata, estoppel, or the law of the case and requires
service of copies of cited unpublished dispositions of the Fourth
Circuit.
Mark WINSTON; Jacqueline Devereaux, Plaintiffs-Appellees,
v.
STATE FARM FIRE and CASUALTY COMPANY,
Defendant-Appellant.
Mark WINSTON; Jacqueline Devereaux, Plaintiffs-Appellants,
v.
STATE FARM FIRE and CASUALTY COMPANY,
Defendant-Appellee.
No. 95-2783.
No. 95-2705.

United States Court of Appeals, Fourth Circuit.

Argued June 6, 1996.
Decided Sept. 5, 1996.

ARGUED: Stephen Anthony Horvath, TRICHILO, BANCROFT,

MCGAVIN, HORVATH & JUDKINS, P.C., Fairfax, Virginia, for
Appellant. Kevin Roger Hildebeidel, STEPHEN K. CHRISTENSON,
P.C., Fairfax, Virginia, for Appellees. ON BRIEF: Stephen K.
Christenson, STEPHEN K. CHRISTENSON, P.C., Fairfax, Virginia;
Donald E. Coulter, Manassas, Virginia, for Appellees.
Before ERVIN, NIEMEYER, and HAMILTON, Circuit Judges.
OPINION
ERVIN, Circuit Judge.

State Farm appeals following a jury verdict in favor of Mark Winston and
Jacqueline Devereaux, arguing that the district court erred when it allowed the
jury to consider the issue of materiality and when it failed to instruct the jury on
the meaning of"clear and convincing." Winston and Devereaux have crossappealed, challenging the district court's refusal to submit the question of State
Farm's good faith to the jury, as well as its instructions on the issues of arson
and misrepresentation. For the reasons that follow, we reverse and remand for a
new trial.

I.
2

Mark Winston and Jacqueline Devereaux, to whom we will refer as

"Devereaux" for simplicity, own a house in Manassas, Virginia. The house
burned on February 15, 1993, and Devereaux promptly sought to recover under
a State Farm fire insurance policy. State Farm suspected arson and conducted
an investigation. Devereaux claimed that she spent the evening of February 15
at her parents' home, and discovered the raging fire when she returned home.
The home and its contents were almost totally destroyed.

State Farm retained a fire investigator, who concluded that the fire was caused
by flammable liquids being poured into a wall register. The insurer's
investigation also uncovered what it considered to be possible motives for
Devereaux to set fire to the property: the house was in terrible condition, and
Devereaux may have been having financial difficulties. State Farm could not
confirm Devereaux's explanation of her whereabouts the night of the fire. It
also contended that Devereaux had removed a number of valuables from the
home prior to the fire, and inflated the values of some possessions in her
insurance claim. State Farm denied Devereaux's claim.

Devereaux filed an action alleging bad-faith breach of contract in Virginia state

court; State Farm filed a counterclaim seeking a declaration that the policy was
void based on material misrepresentation and arson. State Farm also removed
the action to federal court based on diversity of citizenship. At trial, the jury
deliberated for about an hour, then returned a judgment in Devereaux's favor
for $74,567.94. The district court denied State Farm's motion to set aside the
verdict and denied Devereaux's motion for attorney's fees and prejudgment
interest. The district court also denied State Farm's request for a declaratory
judgment.

II.
A.

State Farm defended against Devereaux's claim of liability under the policy
based, in part, on its contention that Devereaux made material
misrepresentations in the course of its investigation. The policy contained the
following provision:

6
This
policy is void as to you and any other insured, if you or any other insured under
this policy has intentionally concealed or misrepresented any material fact or
circumstance relating to this insurance whether before or after a loss.1 State Farm
now contends that the district court should have decided the question of materiality,
and erred by submitting the issue to the jury.
7

State Farm argues that Virginia law, which applies in this diversity action,
dictates that materiality be decided by the court, not the jury. See Harrell v.
North Carolina Mutual Life Ins. Co., 213 S.E.2d 792, 794 (Va.1975); Old
Republic Life Ins. Co. v. Bales, 195 S.E.2d 854, 856 (Va.1973); Chitwood v.
Prudential Ins. Co. of Am., 143 S.E.2d 915, 918 (Va.1965); Scott v. State
Farm, 118 S.E.2d 519-23 (Va.1961)). The cases on which State Farm relies all
involve the issue of materiality in the context of applications for insurance, not
loss investigations. Our research has revealed no cases addressing whether the
issue of materiality in the context of an insurer's loss investigation is an issue
for the court or the jury.

Virginia's Model Jury Instructions define a "material fact" as "one which

influences a person to act or not to act." Instr. No. 39.020 (1993, Civil Ed.).2 A
representation in the context of an insurance application is "material to the risk
if it would reasonably influence the insurance company in deciding whether to
issue the policy." Time Ins. Co. v. Bishop, 425 S.E.2d 489, 492 (Va.1993).
Similarly, material misrepresentations during loss investigations would
reasonably influence the insurance company not to pay a submitted claim.
Without specific guidance from the Virginia courts that loss investigations are
different from applications for these purposes, we shall rely on the closest
analogy, and rule that materiality in the context of a loss investigation is a
question for the court. Therefore, the district court erred in submitting this issue
to the jury.

The jury found only that Devereaux made no material misrepresentations. We

cannot now know whether the jury found that Devereaux made no
misrepresentations, or found that she made misrepresentations that were
immaterial. Thus we cannot find this error harmless.3 Furthermore, we reject
Devereaux's contention that, even if it were error to submit the issue of
materiality to the jury, State Farm invited this error by proposing the
instructions used by the district court. State Farm's proposed instruction on the

definition of materiality was submitted to the jury, but State Farm submitted
this jury instruction only after the court declined to decide the issue of
materiality. State Farm cannot now be faulted for so proceeding.
B.
10

State Farm argues that the district court should have instructed the jury on the
definition of "clear and convincing" evidence. With minimal legal analysis,
State Farm concludes that "[t]he probability that the jury held the defendant to
a heightened standard of proof and the resultant prejudice to the defendant
requires that the decision be overruled." Apparently State Farm believes that
the jury considered "clear and convincing" to mean the same thing as "beyond
a reasonable doubt." This argument is without merit. The district court
explained to the jury that "clear and convincing evidence" is a higher standard
than "preponderance of the evidence." We find no error, because "the charge
[was] accurate on the law and [did] not confuse or mislead the jury." Hardin v.
Ski Venture, Inc., 50 F.3d 1291, 1294 (4th Cir.1995).

III.
A.
11

Devereaux argues on cross-appeal that the trial court erred when it refused to
submit the issue of State Farm's bad faith to the jury. She sought attorneys' fees
under a Virginia statute:

12 any civil case in which an insured individual sues his insurer to determine what
[I]n
coverage, if any, exists under his present policy or bond or the extent to which his
insurer is liable for compensating a covered loss, the individual insured shall be
entitled to recover from the insurer costs and such reasonable attorney fees as the
court may award. However, these costs and attorney's fees shall not be awarded
unless the court determines that the insurer, not acting in good faith, has either
denied coverage or failed or refused to make payment to the insured under the
policy.
13

Va.Code 38.2-209(A) (1994). Devereaux argues that because the jury is the
"court" for fact-finding purposes, the statute by its terms does not preclude
submission of the issue to the jury; moreover, she argues, the Supreme Court of
Virginia has tacitly approved jury consideration of an insurer's good faith. Brief
of Appellee at 23-24 (citing State Farm Mut. Auto. Ins. Co. v. Floyd, 366
S.E.2d 93, 96 (Va.1988)). Floyd, however, involved a common-law claim of
bad faith failure to settle with a third party, not the statutory availability of

attorneys fees in an action between insurer and insured.

14

The district court correctly concluded that the statutory reference to "court" did
not mean "jury," and decided the issue itself. Devereaux's argument is counterintuitive--"court" is not the same as "fact-finder"--and we cannot assume that
the Virginia legislature chose the word "court" lightly.4 The district court did
not err in refusing to submit this issue to the jury.

15

Because the district court's determination that State Farm did not act in bad
faith was a finding of fact, we review it for clear error. Fed.R.Civ.P. 52(a);
Waters v. Gaston County, 57 F.3d 422, 425 (4th Cir.1995). The Virginia
Supreme Court has explained the inquiry to be used in determining whether a
denial of insurance coverage has been made in good faith, noting that the
proper standard is reasonableness. CUNA Mut. Ins. Soc. v. Norman, 375
S.E.2d 724, 727 (Va.1989). Several of the non-exclusive factors offered by that
court are at issue here, specifically, "whether the insurer had made a reasonable
investigation of the facts and circumstances underlying the insured's claim;
whether the evidence discovered reasonably supports a denial of liability; [and]
whether it appears that the insurer's refusal to pay was used merely as a tool in
settlement negotiations." Id. The district court here found,

16 the instant action, State Farm conducted an investigation of the facts and
In
circumstances and, based on the incendiary nature of the fire and on several
inconsistencies in Plaintiff Devereaux's statement as to her whereabouts at the time
of the fire and in the claim forms that she filed, State Farm denied coverage. This
Court finds that State Farm's decision to deny coverage was a reasonable action in
light of its investigation and was not done in bad faith.
17

Joint Appendix at 298 (Order of August 31, 1995).

18

The district court's conclusions were not clearly erroneous. Devereaux has
failed to convince this court that State Farm's investigation was not conducted
in good faith based on the information available.

B.
19

Devereaux argues that if this court were to remand the case, it must consider
the following errors, which she claims benefitted State Farm. She contends that
the district court erred in instructing the jury that it could find that she made
misrepresentations by the "greater weight of the evidence." Under Virginia law,
fraud must be proven by clear and convincing evidence. Evaluation Research
Corp. v. Alequin, 439 S.E.2d 387, 390 (Va.1994). But misrepresentations in the

insurance application context--to which we again turn by way of analogy--are

governed by Virginia Code 38.2-309, providing that an insured's statements
will not prevent recovery under the policy "unless it is clearly proved that such
answer or statement was material to the risk when assumed and was untrue"
(emphasis added). The Virginia Supreme Court has held that it was error for a
trial court to require "clear, cogent, and convincing" evidence of fraud in an
insurance application. Old Republic Life Ins. Co. v. Bales, 195 S.E.2d 854,
856-57 (Va.1973).
20

Finally, Devereaux argues that the trial court erred when it instructed the jury
that State Farm could prove that she set the fire by "showing clear and
convincing evidence that the fire was incendiary in origin, that the insureds had
the motive to set the fire and that the insureds had an opportunity to set the
fire." She contends that this standard amounts to a presumption of guilt for
homeowners whose homes burn--"[a]ny homeowner has access to their own
property, and, according to the insurance company, has a motive: to obtain the
insurance money." She also complains that the instruction was based on
criminal arson cases. As State Farm points out, however, the standard in
criminal cases is higher than civil cases, so this could not have prejudiced
Devereaux. Furthermore, there was additional evidence of Devereaux's possible
motive to set the fire--which went beyond a bare allegation that she wanted the
insurance proceeds--including the fact that if she were to sell the house "as is"
she would actually owe money.

21

In sum, Devereaux has not persuaded this court that there were errors in the
jury charge.

IV.
22

Because the district court erred when it refused to decide the issue of
materiality, this case must be remanded for retrial. However, we find no merit
in the remaining assignments of error argued by either party.
REVERSED AND REMANDED

The Code of Virginia dictates that fire insurance policies contain the following
provision:
This entire policy shall be void, if whether before or after a loss, the insured has
wilfully concealed or misrepresented any mate

rial fact or circumstance concerning this insurance or the subject thereof, or the
interest of the insured therein, or in case of any fraud or false swearing by the
insured relating thereto.
Va.Code 38.2-2105(A) (1994). Sections 38.2-2107 and 38.2-2108 allow
provisions that deviate from the language prescribed by 38.2-2105 provided
they are at least as favorable as the standard provisions and approved by the
Insurance Commission.
2

We note that the Model Jury Instructions contain no instruction concerning the
materiality of statements made during a loss investigation

In its subsequent order denying State Farm's motion to set aside the jury
verdict, the district court stated that "the Court found the statements to be
material when it sent the case to the jury." Joint Appendix at 297 (Order of
Aug. 31, 1995). This suggests that State Farm may have prevailed had the jury
simply found that Devereaux had in fact made misrepresentations. Still later,
the court ruled that"the defendant State Farm has failed to show by a
preponderance of the evidence that the plaintiffs misrepresented or concealed
material facts." Joint Appendix at 299 (Order of September 20, 1995). But the
court specifically stated that it was "guided by the jury's determination" that
Devereaux had not misrepresented material facts. Thus, this ruling is not an
accurate indication of how the district court would have ruled if it had
considered the issue of materiality in the first instance

The previous version of this statute, 38.1-32.1, specifically provided that an

insured may recover "such reasonable attorney fees as the trial judge may
award if it is determined by such trial judge in such case that the insurer has not
in good faith either denied coverage or failed or refused to make payment to the
insured under such policy." CUNA Mut. Ins. Soc. v. Norman, 375 S.E.2d 724,
726 (Va.1989) (emphasis added)